Price Equalization, Trade Flows, and Barriers to Trade

In this paper we show that price equalization does not imply zero barriers to trade.
There are many barrier combinations that deliver price equalization, but each combination
implies a different volume of trade. We demonstrate this first theoretically in a
simple two-country model and then quantitatively for the case of capital goods trade in
a multi-country model. To be quantitatively consistent with the observed capital goods
trade flows across countries, our model implies that trade barriers must be large, yet
our model delivers capital goods prices that are similar across countries. The absence
of barriers to trade in capital goods delivers price equalization in capital goods but
cannot reproduce the observed trade flows.